1. Payment History -- 35%

The number of accounts paid as agreed and a good payment history give you a higher score.

Negative points lower credit scores because of 30 days, 60 days, and 90 days late on any debt. The dollar amount of these delinquencies also impacts credit scores. Severity of delinquency, how long past due, and number of delinquencies are nasty remarks on some credit reports. The older these derogatory items are, the less impact they have on credit scores. You do not want any present delinquent accounts when applying for a real estate loan.

Never, ever pay a mortgage payment more than 30 days late. Lenders do not like to see any delinquencies on real estate loans.

Adverse public records, such as bankruptcy, judgments, suits, liens, and wage attachments negatively dominate credit history. Any of these items cleared up helps improve a credit score, unless the item is aged. The older the derogatory entry, the less the impact. Any activity on a particular item makes the item update and therefore, remain on the report for another seven years. So, if a derogatory item is more than four or five years old, dont bother with it.

Collection items unfavorably shape credit payment history. The more age a collection account has, the less its consequence. Most mortgage companies require that collection accounts be cleared before lending. If this is your problem, see Help with Collections later in section six.

2. Proportional Amounts Owed -- 30%

The amount owed on a credit line compared to the available credit is termed the proportional amount owed. With a credit card limit of $5,000, the score will be higher if less than $2,500 is owed. Even better is to owe less than 1/3rd of the available credit or less than $1501. To have the highest proportional amounts owed scoring factor, owing less than ten percent of the available balance gives you the best possible rating. On the other hand, owing over $4,500 on an account with a limit of $5,000 lowers your score significantly, especially if you have too many credit cards and other loans with high balances compared to available balances.

Tip: Call your creditor and ask them to raise your available credit as long as you dont use this credit. This raises your proportional amount owed scoring factor.

To raise your credit score dramatically and quickly, pay down as much as possible on each credit line instead of paying off one credit card at a time. If a credit card is totally paid off, it does not compute in the proportional amount owed; therefore your rating does not benefit from paying balances in full. On the contrary, paying balances in full takes the account out of the equation and you dont get higher points for the low proportional amount owed.

3. Length of Credit History -- 15%

Any account over twelve months with a good payment history helps a credit score if the balance is not too high compared to the available credit. Six months is the minimum length of time to establish credit. The time since accounts opened and the time since account activity are factored into the length of credit history.

4. New Credit -- 10%

Whenever you apply for a new credit line, your score receives a negative hit. The more inquiries you generate, the lower your score. Obtaining new credit lowers your credit score. We only apply for credit when applying for mortgages. Every time we get a new mortgage, our credit scores go down.

Never finance a new car or get a new line of credit when you are getting ready to finance property. Wait until after closing to apply for further financing. Be aware that after your new loan shows up on your credit report, your financing abilities shrink. If you need credit funds for any reason, including renovation costs for your new house, apply for this after closing your property purchase.

5. Types of Credit Used -- 10%

The different types of loans taken out by consumers affect credit scores. Credit assessors view mortgage accounts more favorably than consumer finance accounts. Too many installment loans, auto loans, and department store credit cards affect credit negatively. To improve your credit score, pay off installment loans and consumer finance company accounts after you have lowered your proportional amounts owed. Then pay off your department store retail accounts. Keep balances as low as possible on home equity lines of credit because they often count as consumer finance accounts instead of mortgages. Achieve higher credit scores by having only mortgage accounts and a couple of major credit cards with low balances.

Note: In addition to credit scores, lenders consider length of time at residence and employment as well as income and education.

Do You Need a Credit Score of 700?

Dont believe it! We have so many loans; our scores are in the mid 600s, but we buy and sell property all the time. Even with a perfect payment history, we cant get our scores up because we have so many real estate loans with high balances remaining. We often need to get B loans instead of A loans, which means we pay higher tax-deductible interest, points, and fees.

(c) Copyright 2004, Jeanette J. Fisher. All rights reserved.